And no stop gaps, President Obama says a long-term debt deal will be done.

I'm John Defterios in for Richard Quest. This, of course, is QUEST MEANS BUSINESS.

Good evening.

The hacking scandal that took down Britain's most popular tabloid is seeping deeper into Rupert Murdoch's media empire. Today a second News International newspaper is accused of dirty tricks by the former British Prime Minister Gordon Brown. He says men from "The Sunday Times", one of the country's most respected newspapers, tricked their way into his financial records. Meaning that even closing down the tarnished "News Of The World" cannot stop the bleeding for News Corp.

In a moment we'll take a look at the impact this is having on News Corp's bid for BSkyB, Britain's biggest commercial broadcaster, but first let's check in with Dan Rivers, who has been across the story, throughout the day.

It is extraordinary. We would think 24 hours ago this was going to go beyond "News Of The World", into another News International newspaper, you'd say, I don't think so. But it is getting deeper and deeper and wider.

DAN RIVERS, CNN SENIOR INTERNATIONAL CORRESPONDENT: I mean, it is incredible. This morning the story was about victims of 9/11, their families having their phones hacked into. One would think that would be the headline. How could it get any bigger than that? But it has. Now the story is that the former British prime minister alleging that his personal details were accessed, not by the "News Of The World", but by another Murdoch paper, "The Sunday Times". As you say, one of the most respected papers on Fleet Street.

It is alleged that investigators tried to get access to his bank details. That they tried to get access to details about a property he was selling. That they tried to get his son's medical records. "The Sun" newspaper it is alleged, ran a story about his son having cystic fibrosis, a fact that only the doctors and Gordon Brown, and his wife could have known about. Yet that was front-page news in "The Sun". So, two other Murdoch papers now embroiled in this scandal and it keeps getting bigger.

DEFTERIOS: The political implications of this, we see that David Cameron's government is referring this to the Competition Commission. Is this the hope that it will go away and we'll loose attention on it in three to four month's time, or even longer?

RIVERS: Well, this is an interesting tactic by News International. They gave assurances that they would spin off Sky News to deal with concerns over how much ownership of the media they had, to avoid this being referred to the Competition Commission. They have been desperate to avoid it being sent to the Competition Commission, up until this point. Now suddenly, they have done a complete U-turn and have taken away those assurances, meaning it is automatically referred to the Competition Commission, to buy them time, I think. They realize that it is in their interest to kick this into the long grass, as quickly as possible, and get this decision deferred, just put it on the back burner and that is exactly what has happened. So, now the Competition Commission has 24 weeks to weigh up whether, you know, this is a kind of monopoly, effectively, that is being established.

DEFTERIOS: We're short on time, but it looks like Labour, the Labour Party, Ed Miliband, its leader, they smell blood here. They are not going to let it go?

RIVERS: Oh, they were absolutely smelling blood in the Commons today. David Cameron wasn't there. And it was the Culture Secretary Jeremy Hunt who was left to deal with the barrage of questions about David Cameron's judgment in hiring a former "News Of The World" editor as his spin doctor. And, yes, I mean, I think this has been a good day for Labour, a bad, bad day for the government, and an even worse day for the News International.

DEFTERIOS: OK. Thanks very much. Dan Rivers, across the story for us tonight.

In the meantime, News Corp has dropped its promise to spin off Sky News as part of its plan to buy the satellite broadcaster, BSkyB. The deal has been widely criticized in the wake of the scandal. This move means the takeover deal will now spend months going through British regulators rather than the government, which has been taking serious heat, as Dan just talked about, to the scandal now spreading to Gordon Brown. BSkyB shares fell sharply for the second day in a row; down more than 4.5 percent. They have lost almost 16 percent in value since these allegations surfaced. They are not hovering close to their offering price of 7.15 pounds, or around $11 a share. That News Corp originally put on the table for BSkyB.

Let's get more on the financial impact of this and check in with Jim Boulden on the story.

It is incredible.

JIM BOULDEN, CNN FINANCIAL CORRESPONDENT: Yes.

DEFTERIOS: You think you could contain it and then still try to keep that deal alive, for BSkyB, which is very important to Rupert Murdoch. But it is not looking that simple.

BOULDEN: But it is very clear that Murdoch is not giving up. There were so many calls today for possibly, from politicians, saying to Rupert Murdoch maybe you should give up, for now, trying to take over BSkyB. But then we heard that News Corp said they were going to withdraw these undertakings, withdraw these concessions they were making in order to try to take over BSkyB. And it gave the government no choice but to make the decision to send it to the regulatory authorities, the Competition Commission.

As we heard a little bit earlier, the media secretary, the culture secretary, said this in parliament:

(BEGIN VIDEO CLIP)

JEREMY HUNT, CULTURE SECRETARY, GREAT BRITAIN: Today's announcement will be an outcome that I am sure the whole house will welcome.

(JEERS, SHOUTING)

HUNT: It will mean-it will mean that the Competition Commission will be able to give further, full and exhaustive consideration of this merge, taking into account all relevant recent developments.

(END VIDEO CLIP)

BOULDEN: Now you heard all that noise in parliament, it wasn't because people disagreed with Jeremy Hunt's decision. It is because they were calling for it, especially the opposition leader, earlier in the day, they wanted the government to do this, not because News Corp made them do it, but because they thought it was a good idea to send it to the competition authority.

This is David Miliband, the opposition leader. Here is his reaction in parliament, just a few hours ago.

(BEGIN VIDEO CLIP)

DAVID MILIBAND, LEADER, BRITISH LABOUR PARTY: Mr. Speaker, on BSkyB, this government is in complete disarray. Does the deputy prime minister speak for the government? If so, is the culture secretary now asking Rupert Murdoch to drop the bid? Can he now assure us, can he now assure us, that on the basis of his new position, no decision will be made on the BSkyB bid until the criminal investigation into phone hacking is complete.

(CHEERS)

MILIBAND: Nothing else can give the public the confidence they need.

(END VIDEO CLIP)

BOULDEN: Now, I would have to say analysts are very split on whether this makes it more likely or less likely that News Corp will get BSkyB, but here is why it is so important to Rupert Murdoch.

New Corp revenues, 2010, $32 billion. BSkyB, the satellite broadcaster here in the U.K., with also some phone and internet, up until June 2010, for 12 months, $9 billion. So, you see $32 billion for News Corp, $9 billion would have gone into there if Murdoch owned it all. And this year some projections for BSkyB, $10 billion in revenue. No doubt, Mr. Murdoch, not giving up easily.

DEFTERIOS: Indeed, and fat profits off that $10 billion for next year. Thanks very much, Jim Boulden, analyzing the impact on the stocks. Well, it is not only BSkyB shares struggling with the scandal. News Corp shares fell for a fourth day in a row, down 4.5 percent, so far. Since this controversy began it lost around 11 percent of its value, or $5 billion. And this isn't the first time when News Corp investors have been through a very rocky ride.

Let's go now to outside News Corp Headquarters, in New York City, and check in with Felicia Taylor, for that side of the story.

I didn't think a week ago they thought this could cross the Atlantic and really impact News Corp's operations in New York. But that is certainly a different story now.

FELICIA TAYLOR, CNN FINANCIAL CORRESPONDENT: Absolutely, John, there is no question about it. If you take a look at News Corp stock in the last five years it virtually unchanged. But we spoke to one analyst at Lazard Freres, who is actually fairly bullish on the stock and says the loss of "News Of The World" really isn't a problem for the overall company, because it didn't represent the enormous profits generating force.

They are looking to focus more on their television holdings, as you heard Jim Boulden say. That is really the focus and they have not let go of BSkyB, at all. As a matter of fact, another analyst said that by tabling this for the time being, so that it moves itself, in terms of calendar-wise into 2012, it is actually a good thing for the company, because it takes the politics out of it.

The guy from-the analyst from Lazard Freres basically said, that they wanted to reduce the newspaper holdings, overall things are still good for the company. And frankly, in a couple of year's time, you would see this- or he sees this, at least, as a great buying opportunity.

But you are no doubt right, there have been many problems with News Corp. They acquired Dow Jones, it is still not convinced that that was a good acquisition. The selling of MySpace, which certainly was at a tremendous loss. So there have been a number of things that News Corp hasn't done well, but nevertheless the Lazard Freres analyst thinks this is a great buying opportunity because the stock is so undervalued, John.

DEFTERIOS: So that is assuming, Felicia, that they can keep BSkyB alive. And Jim just went through the numbers here on the board, we're looking at $10 billion in revenues. About 1/3 of News Corp revenues from BSkyB alone, profits of $1.6 billion, it is not about a newspaper anymore. It is right across the board for the company. Isn't that the big challenge?

TAYLOR: Yes, absolutely. It is really not about his newspaper holdings. This company owns tremendous television properties and that is what it is going to concentrate on. And that is where the revenue growth is coming from. The thing that they are going to have to worry about in the short term, you know, the headlines are still going to be kind of questionable. We don't know what is going to happen with shareholder lawsuits. We don't know if there is going to be an inquiry made on behalf of what is called the foreign criminal-uh, uh, the FCPA-Foreign Criminal Process Act-and that is something that could happen on behalf of the Department of Justice and the FTC here in the United States. And that would be a deep, deep concern for the company overall. Those kinds of lawsuits can not only take years to overcome, but they can take millions of dollars to actually settle, John.

Well, News Corp shares aren't the only thing that is down today. You are looking at live numbers now for the New York Stock Exchange. We'll tell you why, when it comes to European debt, size does matter. And it does spill over to other markets.

(COMMERCIAL BREAK)

DEFTERIOS: Tonight we are seeing a major global sell off as European leaders fight to contain control of the debt crisis now in Brussels. For the first time policymakers seem ready to accept some form of default in Greece. While traders around the world are turning their attention to what could potentially be a much bigger problem and that is Italy.

Here is the picture right now on Wall Street. Bank of America and JP Morgan are worse off at the moment. Europe's major markets also look battered. Credit Agrico lost more than 7.5 percent, alone, in Paris. And Commerze Bank dropped more than 8.5 percent in Frankfurt. Losses were even greater in Greece, Italy and Portugal, the so-called peripheral markets. Again, banks were badly hit against the back drop of the EU officials holding talks in Brussels. They are also working on a second bailout plan for Greece. And at this time, private bond holders could well be asked to take a loss. They might be talking about Greece, but they are thinking about Italy.

Let's go live now to New York, Alison Kosik has the latest on what is happening on Wall Street. So, you have one eye looking towards Washington, and the debt talks there. Another eye across the Atlantic focusing on debt talks in Brussels. And then behind that the media group under pressure. It is pretty complicated.

ALISON KOSIK, CNN FINANCIAL CORRESPONDENT: Oh, yes. There are definitely enough worries to go around. But you know what, John, Italy really is the big focus here on Wall Street. And the worries that it may default on its debt is really the reason why you are seeing the sell off here on Wall Street, with the Dow down 153 points. You know, those Greek debt issues, they have been a big problem for months now, but the reality is Italy is much more important. It has a much bigger economy. It is the world's seventh largest economy. You know a debt and banking crisis there, would be more of a problem for the rest of the world than Greece's debt issues. And analysts say, you know what, investors are beginning speculate against Italy and its worries about its debt problems spreading.

And then, you said it, we have other-our debt problems of our own, here in the U.S., that are weighing down the markets. You know, we don't have a resolution yet on the debt ceiling. And if the U.S. doesn't reach a budget plan by August 2, and defaults on its debt, that could make for a huge financial catastrophe. So, yes, the stakes are very high for lawmakers here to reach a resolution and to reach one soon.

And yet, there is one more issue that is worrying Wall Street, European banks, they are also undergoing stress tests. Many banks are expected to fail those tests meaning they might not have the right mix of cash and debt to survive a new financial crisis. So there are a lot of things weighing on the markets. Those are just a few, John.

DEFTERIOS: OK. Alison Kosik at the New York Stock Exchange. Well, as Alison noted Italy is a much bigger concern to traders in Greece, Portugal or Ireland. Let's give you a visual picture of what this all means. First, let's take a look at the size of economy. You can see here, Italy is in a big green patch, because it is so large. Let's take a look at-and you will see what I'm talking about. 2,128 billion euros, that is $2.12 trillion, on the size of the Italian economy. It's debt is even a little bit more concerning, because it is $2.6 trillion, at 120 percent.

Now, you see what we are talking about in terms of the comparison. There is a containment strategy that has been underway, by the European Union to try to limit this to Greece, Portugal and Ireland. The Greek economy $325 billion, right? Come over to Portugal. Another one that has had to go cap in hand to the European Union, $235 billion. This is the size of the economy, once again. And then, we look at Ireland, and the Kelly green, not surprisingly there, at $223 billion. You add those three up, we are looking at roughly $800 billion of GDP, stacked up against Italy, which we noted is $2.1 trillion of GDP.

Now, this is where it gets really complicated, is looking at the debt levels that are taking place right now. The Greek debt level, 142 percent; this is at the end of 2010, by the way. It is climbing to 157 percent in 2011, as we speak. Let's move this onto Italy. And this is at the heart of why we have concerns right now, Italy at 119 percent of GDP; 119 percent of a $2-trillion economy. Ireland, at its level, 96 percent of GDP, again for 2010, that is climbing. And will go over 100 percent. And finally, you have Portugal, rounding out the top four-with a double hit on the touch screen-at 93 percent of GDP. So you can why we have all of these concerns from Greece, Italy, Ireland and Portugal.

Well, Italy's borrowing costs are fast rising into the danger zone, as I just noted. Greece, Portugal and Ireland all sought help when their bond yields, effectively, the price of borrowing rose against this magic number of 7 percent. Now Italy is facing a squeeze in the international funding markets. Right now, Italy facing at least a stretch and tensions, a bit rising to just 5.5 percent on the 10-year bond. That is a nine-year high. More than double Germany's rate on the 10-year bond of 2.6 percent.

The market thinks that 7 percent is a killer. The number, once the 10-year bonds went above 7 percent for Greece and Ireland it was a matter of just weeks before Portugal had to do the same. So, if 7 percent is the magic number and you have the Italian 10-year bond at 5.5 percent, will it just be two to three weeks before we have the same story playing out for Italy?

Let's bring in Kathleen Brooks, with the Research House, that has studied this quite carefully.

It is nice to have you on QUEST MEANS BUSINESS.

You know, it is extraordinary about the Italian story. I was looking back and it is not surprise. We can go back to 1993 and look at the Italian debt to GDP. It was above 100 percent then, but the Italians always had this luxury of devaluing and exporting their way out of trouble. They often yearn back for the vecula (ph) ol' lira. They don't have that option now in the euro.

Why is the market focusing right now, on Italy, finally?

KATHLEEN BROOKS, FOREX.COM: I think there are two reasons. Firstly, the markets hate the D word. So the minute the EU authorities were talking about a potential default for Greece then investors started to run scared. And that leads onto the second reason, really, because then they started really scrutinizing balance sheets. Whereas before they had allowed the kind of larger economies, even with the large debt levels, to really get away with it. Which is why Italy was able to amass all this debt over the last 20, 30 years, nearly.

But now it is just not going to be OK. So, now, if you actually look at it, Greece, like Greece had sluggish, terrible growth, a terrible recession, enormous debt. You know, very uncompetitive economy, also very bad demographics. Italy has actually got something quite similar. But it is not as bad of shape, but it is, you know, no wonder it was the next domino to fall necessarily.

DEFTERIOS: Well, if you go back to the 1990s, they average about 2 percent growth.

BROOKS: Yes.

DEFTERIOS: Lately, they have not recovered from the 2008 crisis. We are looking at between 0 and 1 percent growth. It is just not enough to service your debts. Politically are you worried about Silvio Berlusconi and this tension with Giulio Tremonti the finance minister, about whether or not they can actually implement $100 billion in cuts over the next three years?

BROOKS: I don't think they have a choice, they have to. You know that is it. You know they call it-

DEFTERIOS: But the market is not believing it.

BROOKS: Exactly.

DEFTERIOS: That is what we are hearing today, right?

BROOKS: They are not. And the fact that there is troubles in politics, there is political scandals in Italy all the time, you couldn't pick a worse time, right now, to have it. That is the problem, especially to have the finance minister involved in some way.

But you are right, the markets certainly don't agree with it. Italy has been slow to pick up on this before. So what they really need to do is actually get it passed in congress, to be able to get all of their cuts put in place, their budgets put in place. Angela Merkel came out today and started putting the pressure on. And I think when she does, they have really got to start to do something about it, because Germany is the paymaster there.

DEFTERIOS: But very quickly, here we have the Euro group finance ministers sitting down in Brussels tonight, and the ECONFIN meeting tomorrow. They don't have a strategy for containment, to Portugal, Ireland and Greece. This is quite clear. They haven't even decided on a rollover or a buyback of Greece's debt.

BROOKS: Absolutely.

DEFTERIOS: Isn't that incredibly concerning to you, as you sit tonight?

BROOKS: Oh, it is concerning but it is not surprising, because for the past year they haven't got a mechanism, really, to solve this crisis in the long-term. That is what they need to sort out. It looks like they are going to sacrifice Greece with default, hopefully re-finance (ph) Spain and also Italy, to try to limit the contagion. Whether or not that works, again, you'll have to wait, have to hear from them tomorrow.

DEFTERIOS: At least we sit on pins and needles. At least they do in Brussels, that is for sure.

BROOKS: That's for sure.

DEFTERIOS: Nice to see you, Kathleen Brooks of Forex.

BROOKS: And you, thank you.

DEFTERIOS: Analyzing the Italian market.

Well, just ahead, life is a beach as Richard shows us. Why the train in Spain, beats the plane. We'll be right back.

(BEGIN VIDEO CLIP)

RICHARD QUEST, CNN ANCHOR, QUEST MEANS BUSINESS: Coming up after the break, from the coast to the capital, the railway line that is given Valencia a new lease on life. "Future Cities" on QUEST MEANS BUSINESS, next.

(COMMERCIAL BREAK)

DEFTERIOS: Tonight imagine you are enjoying an evening sail on the Mediterranean, just 90 minutes after leaving your desk. Well, now that we've got your attention, this week's "Future Cities" is back in Valencia. The city by the Med wants to be Madrid's seafront. And with Spain's new high speed rail lane getting from the capital to the beach is suddenly a lot like commuting between London and say, Cambridge. Richard took the ride to see why life is a beach for Valencia's economic future.

(BEGIN VIDEOTAPE)

QUEST (voice over): Valencia might not be Spain's biggest city, or its most famous, but if there is one thing this place has over its neighbors, is kilometers of golden beach. This sandy Mediterranean coast, is a major tourist attraction, and a big contributor to the local economy. Getting more people on the beach is part of Valencia's vision for its future.

And the new high-speed rail connection is a crucial part of making this happen. It brings the tourists of Valencia from the land-locked capital, Madrid.

RITA BARBERA NOLLA, MAYOR, VALENCIA, SPAIN (through translator): Madrid is the capital of the Spanish Kingdom. A beautiful city that has a fraternal relationship with us. What is the fundamental link? With Madrid it is the AVA train. Now Madrid has a seaside. It has Valencia's seaside. And us, what have we gained? We have gained an international airport.

QUEST: So we need to head to Madrid to really test this new train and see how it brings the capital to the coast.

(On camera): While the Spanish capital obviously has huge amounts to offer, it is has always lacked easy access to the sea. The high speed rail link has changed all of that. And this is now the quickest way from Madrid to the beach.

With Valencia having, now, high speed access it joins Malaga, Barcelona, and Seville, to increase the range of the network; giving those who work in Valencia, access to Madrid and beyond.

JOSE SALINAS, VALENCIA TOURISM: Connectivity is one of the key factors. To be well connected with the capital of Spain, and up to this point, with the rest of the world, it is very important because it permits us to attract visitors from other continents.

QUEST: To ensure the visitors don't pass Valencia by the city is making sure it gets maximum exposure inside Madrid's larger station.

(Voice over): All aboard, next stop, the beach. Onboard, there are three classes of service. Wherever you sit, the accommodation is at least as good as anything offered in the air.

(On camera): It is not surprising that with a journey time slashed to 90 minutes, the train has put the plane out of business.

(Voice over): Since the opening of the AVE, between Madrid and Valencia, airlines have seen their market share on the route drop by 30 percent. It got so bad RyanAir decided to terminate service between the cities altogether.

For its passengers the train fulfills many purposes, from business trips to saucy stamp dos.

UNIDENTIFIED FEMALE: She's getting married.

QUEST: Oh, you are going to a hen party?

UNIDENTIFIED FEMALE: Yes.

QUEST: So you are going to Valencia for that. Where do you live?

UNIDENTIFIED FEMALE: Madrid.

QUEST: What do you think of the train?

UNIDENTIFIED FEMALE: It is beautiful and it is very comfortable, because you are in Valencia in just one hour and a half, so it is very nice. It is very quick.

QUEST: Is this the first time you have taken the train?

UNIDENTIFIED FEMALE: Yes.

(LAUGHTER)

QUEST (voice over): By bringing more visitors to Valencia the AVE connection has had widespread affects on the businesses here. Visitors are staying longer.

JUI LIU, HOTEL LAS ARENAS: Before the AVE came, they leave on Sunday morning and right now they are leaving on Sunday afternoon, late evening. So they are spending the whole day here at the hotel, eating lunch, so it is increasing our sales.

QUEST: In Valencia's case faster travel also means faster economic growth. Fortunately, Spain's trains are on average amongst the fastest in the world.

(Voice over): Safety is always first when traveling at such high speeds. As you can see, inside the cockpit.

(On camera): If you wanted to stop the train in an emergency, how far would the train travel.

UNIDENTIFIED MALE: (Speaking Spanish)

QUEST: Three kilometers.

UNIDENTIFIED MALE: Exactly.

QUEST: Wow.

(Voice over): The AVE train between Madrid and Valencia is almost always on time, as I discovered. Barely time for a snack and a newspaper, we're in Valencia.

(On camera): From the capital to the coast in 90 minutes, you know what time it is? Time to enjoy the beach. The new line from Madrid to the future city of Valencia is a good example of the train in Spain, clearly sinking (ph) the plane.

(END VIDEOTAPE)

DEFTERIOS: Debt debacles on both sides of the Atlantic. Hear why President Obama says he's ready to take the heat to get a U.S. deal done. Then, a central bank chief tells us why he thinks America can rise to the occasion.

(COMMERCIAL BREAK)

DEFTERIOS: Debt debacles on both sides of the Atlantic -- hear why President Obama says he's ready to take the heat to get a U.S. deal done.

Then, the central bank chief tells us why he thinks America can rise to the occasion.

(COMMERCIAL BREAK)

DEFTERIOS: Welcome back.

I'm John Defterios and You're watching QUEST MEANS BUSINESS.

And here are your headlines at the bottom of the hour.

Former British Prime Minister Gordon Brown says journalists working for Rupert Murdoch's News International tried to illegally acquire his private medical and financial information. The revelation could widen the scandal that has already led to the closure of one tabloid, the "News of the World." News International says it wants to see Brown's evidence so it can investigate those claims.

The U.S. and French embassies came under attack today in the Syrian capital. This image posted online shows protesters climbing over a fence at the U.S. compound. The U.S. State Department spokesman says a television station that is heavily influenced by Syrian authorities encouraged the violent demonstration.

The French Foreign Ministry says security guards had to fire warning shots to break up the protests at its embassy.

Scuba divers are searching the wreckage of the sunken boat in Russia's Volga River. Some of the 80 survivors say the overcrowded cruise ship went down quickly on Sunday after being hit by a wave. At least 55 people are confirmed dead. Dozens of others are still missing.

The Cypriot defense minister and national guard chief have resigned following a deadly explosion at a naval base at least 12 people were killed when a grass fire spread onto the base and ignited crates of gunpowder. Dozens of other people were wounded.

Well, we may as well "pull off the band and eat your peas" -- that declaration from U.S. President Barack Obama today, as he calls for an end to the stand-off between the White House and Congressional Republicans over raising the amount of money America can now borrow.

(BEGIN VIDEO CLIP)

BARACK OBAMA, PRESIDENT OF THE UNITED STATES: I'm happy to consider all -- all options, all alternatives that they're looking at. The things that I will not consider are a 30 day or a 60 day or a 90 day or a 180 day temporary stop-gap resolution to this problem. This is the United States of America and, you know, we don't manage our affairs in three month increments. You know, we don't risk U.S. default on our obligations because we can't put politics aside.

So I'd say -- I've been very clear to them, we're going to resolve this and we're going to resolve this for a reasonable period of time. And we're going to resolve it in a serious way.

(END VIDEO CLIP)

DEFTERIOS: Mr. Obama said both sides will meet every day until the debt dispute is resolved. The negotiations so far have failed. The big sticking point, of course, is taxes. Right now, the U.S. is more than $14 trillion in the red. Failing to raise that debt ceiling by August 2nd could result in a default, believe it or not. If that happens, the world's richest nation would be unable to pay its bills.

We're going to check in with Brianna Keilar at the White House shortly.

We now have a full blown debt crisis, as a result, playing out on both sides of the Atlantic.

I spoke about the situation with the Bank of Israel governor, Stanley Fischer, who also was a former deputy managing director of the International Monetary Fund.

I asked him, can the U.S. get itself out of this hole?

(BEGIN VIDEO TAPE)

STANLEY FISCHER, GOVERNOR, BANK OF ISRAEL: Well, the world does look and wonder. The U.S. has, over the years, shown an ability to deal with crises and it usually finds a way of rising to the occasion.

DEFTERIOS: It doesn't look that way right now, you would agree, though?

FISCHER: Well, they're going pretty close to the brink. And one hopes they don't. I mean the U.S. needs to have American citizens believe its government will -- will meet its debts. And the U.S. is still the leading country in the global economy and the world needs the U.S. dollar and the US' debt to be the strongest in the world. And that should happen. Otherwise, it will have serious consequences for the world economy.

DEFTERIOS: The other thing I wanted to talk to you about is what's taking place in Europe with the -- the European debt crisis. It seems to raise red flags when you have credit rating agencies saying that particular bonds in Portugal or Greece are junk and we see a selective default taking place. And you have a central bank suggesting we could still use those bonds as collateral.

Isn't that going to erode confidence over time in Europe?

FISCHER: The rating agencies have a very hard job to do. And by the nature of things, because they're taken seriously, if the quality of bonds is going down, they're going to have to call it if a government is getting into more trouble. That's precisely the time you're trying to save the situation.

So inherently, they have very difficult calls to make. And sometimes they may exaggerate. That's what's being said now.

DEFTERIOS: Do you think they have exaggerated here, sir?

FISCHER: I -- I don't have the -- I haven't looked at their reports enough to know whether that's -- that's the case. It's certainly clear that somewhere between 2008 and now, they've had to make calls which they should have made, that the situation was getting worse.

But that looks pro-cyclical. It's another element that makes the economy more cyclical than it has to be. It's just a dilemma and that's the way the world is. You say the world is getting worse and somebody's job is to tell you whether it's getting worse.

DEFTERIOS: Well, we've had a very stable currency in Europe. In fact, it's been rising during the debt crisis because of the challenges that we see in the United States.

But isn't it a slippery slope, if you ignore what the -- the agencies are saying and -- and put that aside to try to work through a debt crisis?

FISCHER: Well, I don't think they want to put it aside.

The question is when -- when are these calls made and on what -- what dates should they be made?

As I say, it's very difficult for the debt agencies and their role is a very tough one. And say sometimes I ask whether we actually shouldn't make our calls on things independently of the debt ratings. But that's not yet a fully worked out thought.

DEFTERIOS: Well, that's fascinating, because Angela Merkel was suggesting the same, we should retain this right of independence to make our own judgments in confidence.

Would you agree with that, then?

FISCHER: I don't think you can do it in confidence. And there are markets out there, you're making decisions. You need the markets to support you, to say, trust me and not explain why is -- is going a bit far.

(END VIDEO TAPE)

DEFTERIOS: OK. Stanley Fischer of the Israel's central bank and former deputy managing director of the International Monetary Fund.

Well, we want to take you to the White House now for more on the U.S. debt crisis and see if there's any progress really being made.

Brianna Keilar join us now from the White House -- Brianna, at some point here, we have about three weeks before the U.S. calls the red flag and default.

Can you start to close the gap between the White House and the House Republicans on Capitol Hill, do you think?

BRIANNA KEILAR, CNN CONGRESSIONAL CORRESPONDENT: Right now, John, they are very far apart. They have remained far apart now for weeks. And they continue to be.

What you're hearing from both Republicans and from the White House and Congressional Democrats is this realization that the -- and from the leaders, I should say, that, yes, the debt ceiling does need to be raised, but there's still a huge impasse over tax increases. The White House says that Republicans just will not give anything on this and Democrats are demanding that if there are going to be spending cuts to very important priorities of theirs that they want to see tax increases.

But there's also other things that are playing into here -- entitlement reform, reform for those social safety net programs, very large and expensive programs, here in the US. And right now, over the weekend, we saw discussions over a very large deficit reduction package -- $4 trillion in deficit saving over 10 years -- really kind of fall apart, Republicans pulling out of that.

The Democrats in the White House say they're continuing to fight for that. But right now, it looks like they're looking at a smaller package of a little over $2 trillion.

So what about maybe a short-term deal?

This is something that people have wondered about, could there be a stop-gap measure to just give negotiations a little more time?

Unequivocally, President Obama said no today.

Listen to him.

(BEGIN VIDEO CLIP)

OBAMA: I will not sign a 30 day or a 90 day extension. That -- that is just not an acceptable approach. And if we think it's going to be hard -- if we think it's hard now, imagine how these guys are going to be thinking six months from now, in the middle of an election season, when they're all up.

It's not going to get easier, it's going to get harder. So we might as well do it now. Pull off the Band-Aid, eat our peas.

(END VIDEO CLIP)

KEILAR: Pull off the Band-Aid, eat our peas -- you kind of see President Obama there. He's -- he's kind of, John, trying to be the parent and saying Democrats, Republicans, you need to make some sacrifices and come to some common ground.

You mentioned that August 2nd deadline, John. The understanding here in Washington is it's actually much -- it's going to come sooner than that, really, here in the next week, because it takes a lot of time to put any sort of agreement into legislative language and also more time to push it both through the House of Representatives and the Senate.

So, really, that deadline is even sooner than August 2nd.

DEFTERIOS: Do you think that the Republicans will pay a price if they want to retain the tax cuts put in by President Bush previously for high income earner?

Do you think they can hold the ground on those previous tax cuts?

KEILAR: They were able to do it in the -- in a negotiation with President Obama before. So they felt that they were able to do it. What they also have in their corner is some Democrats who want to hold the ground on that.

I think when you're hearing about potential tax increases, you're hearing about much smaller goals. I think even Democrats are realistic that when it comes to large tax increases, they're not going to win on that. We're talking about perhaps tax hikes -- Democrats want. You probably heard the corporate jet loophole one -- loopholes, they say -- tax breaks enjoyed by oil companies, gas companies, corporate jet owners, things like that. I think a widespread tax increase. There are Republican obstacles. There are also Democratic obstacles to that -- John.

DEFTERIOS: OK, thanks a lot for the update.

Brianna Keilar joining us from the White House.

Well, believe it or not, it was a blue Monday for Australian stocks. And it's all because one of the world's worst polluters wants to go green. We'll show you what happened. That's next on QUEST MEANS BUSINESS.

Stay with us.

(COMMERCIAL BREAK)

DEFTERIOS: Tonight, plenty of reaction to one of Australia's biggest economic and environmental reforms in a generation. Some companies are warning consumers they may have to foot the bill for the country's new carbon tax. Think higher plane fares.

Australia's top 500 polluters will have to hand over about $25 U.S. per ton of carbon. The country is number 15 in the carbon emissions hall of shame. But it's getting a thumbs up for its efforts from the Climate Institute think tank, based in Sydney. still, not everyone is so sanguine about this. We've decided to pick three different companies that are global players from Australia the kind of make the point.

First, the Qantas impact. They're saying extra costs to the consumer right away. It says it will lose more than $120 million U.S. from the impact of the carbon price system. The carrier says that it won't be able to absorb the extra costs and will have to pass it on to the consumer. Fare increases will vary, but the extra cost could be about $3.50 per single domestic flight.

Let's stay in that sector and look at Virgin Blue. Higher fares are, quote, unquote, "inevitable." They say -- the carrier says the carbon pricing system will more than double the aviation fuel tax, believe it or not. Virgin Blue has been in talks with the Australian government voicing those concerns.

And then we've talked about the soaring cost of copper and everything else. Let's look at one of the big miners around the world, that's Rio Tinto. Job growth may be hindered by all of this. And it says it's not happy and it's warning that the carbon tax could hinder job growth in the future. The mining giant also says it could undermine the country's ability to compete globally.

Rio Tinto says the carbon pricing plan is an unfair tax on Australian exporters overall.

The chief of another Australian mining body told CNN that a $25 tax could mean -- and look at this bottom line -- $30 billion for the industry. And that, of course, would have to be passed on through the chain.

(BEGIN VIDEO CLIP)

SIMON BENNISON, CEO, ASSOCIATION OF MINING & EXPLORATION COMPANIES: Many businesses will obviously try and flow this cost on to consumers or else they go to have to absorb it. The argument is the cost to actually drive change into other sources of energy, you know, the incentive just isn't there at this stage. And, you know, a lot of the power generators, for example, that have talked about a tax of about $70 plus per ton to actually initiate change and provide some sort of incentive.

(END VIDEO CLIP)

DEFTERIOS: Well, Australian stocks were the worst performers in Asia. They always say that change is never easy. A blue Monday for BlueScope Steel and Macarthur Coal. Let's take a look at how they performed. Not surprisingly, one down 6.75 percent. Macarthur Coal down 2.8 percent. Qantas, on those concerns about the higher fuel costs and Virgin Blue down 3.25 percent. And Virgin Blue down nearly 3 percent on the session.

Let's get an update on what's happening in the worldwide weather scenario.

Let's check in in at the International Weather Center w Jenny Harrison -- jenny.

JENNY HARRISON, CNN METEOROLOGIST: Hey, John, yes. A bit stormy, I'm afraid, across the central regions of Europe. It's been fine and dry across the Mediterranean for the last couple of weeks, but all the while, these systems have been erupting across the central regions, across the line of the alps, as well, as you can see, in the last few hours. A line of storms now further toward the east.

Of course, they've all been happening because of these different areas of low pressure that have been coming across the region. Some very heavy thunderstorms in the last few hours working their way through the northeast of Germany into the northwest of Poland.

This is where the storms will be strong as we go through the rest of Monday. And then swiftly following on behind that, say, a bit of a break and then we'll see another area of low pressure.

So that does, unfortunately, mean some more fairly severe storms.

And these storms could be bringing with them some strong winds, damaging hail. And so because of that, there are some warnings in place, you can see, across Eastern Europe, as we go into Tuesday morning. That really is the remnants, if you like, of that system now, which is on its way through Poland.

There will be some delays at the airports on Tuesday. Amsterdam, the winds are picking up as we go later Tuesday into Wednesday and the approach of that next area of low pressure, some cloud and some showers elsewhere. And, also, Athens, the eastern end of the Med, too, some fairly strong winds. But conditions are basically staying fine and dry.

As for the Tour de France, well, the temperatures are certainly heating up now, of course. We're heading further toward the south, fairly long status on again, over 200 kilometers. And you can see the sort of terrain that the cyclers have been riding through.

But it should be a mostly dry day. In the afternoon is where we're going to see the chance of some thunderstorms. The temperatures, as I say, at around 31 degrees Celsius at warmest. But there's quite a lot of rain and thunderstorms working their way through much of France, as we go through the next 48 hours. Some of them will find their way further toward the south.

And temperatures, 34 in Rome this Tuesday, and 28 Celsius across in Paris. But the heat is really on across the United States, as indeed, are the thunderstorms, working their way now across the Upper Midwest. You can see this belt of warnings, all these yellow boxes just popping up. These are thunderstorms, which are moving quite quickly, head across the region.

Right now, Chicago O'Hare -- look at some of these wind gusts that have been reported on Monday -- 120 kilometers an hour; Illinois, 129 kilometers an hour. But, in fact, the airport, Chicago-O'Hare, now reporting 200 flights that have been canceled and there are some very long delays in place, as well. It's not actually showing up right now, but believe you me, there are long delays at that airport.

As for the temperatures, this is what we're going to be talking about for the next couple of days. Temperatures well above average across the South, as much as 8 Celsius above average. And here are some of the high temperatures from Sunday. Look at this, Kansas here. We've got the highest temperature coming in at 44 Celsius. The average there is 34 degrees Celsius.

So not surprisingly, there's a huge area across the south of the U.S. where there are warnings in place. A heat advisory and then these areas in pink are where the temperatures are really excessive.

And you have to also bear in mind that it's the humidity that's been factored in, as well, to the temperatures. So, for example, Dallas, 41 the high on Tuesday, expected. Thirty-five is the average. But with the humidity, feeling more like about 45, 46 degrees. And remember, these temperatures, they're always for the shade. So if you're in the sunshine, it is going to be feeling a lot hotter than that 41 degrees Celsius in Oklahoma City -- John.

DEFTERIOS: Especially with that Southern humidity.

HARRISON: Yes.

DEFTERIOS: Thanks very much.

Jenny Harrison at the International Weather Center.

And just ahead, we check the focus for Rupert Murdoch -- his plans to buy BSkyB outright are really up in the air. We'll ask which way the wind is blowing for Mr. Murdoch, when we come back.

(COMMERCIAL BREAK)

DEFTERIOS: The sell-off continues in New York. Traders are deeply worried about the prospect of the European debt crisis spreading now to Italy. Italian borrowing costs are rising fast. It's a red flag to traders, who've seen it happen before in Greece, Ireland and Portugal. Italy is a much bigger economy than those three combined.

The situation at home is also precarious, with lawmakers yet to agree to raise the debt ceiling in the United States. President Obama is urging both sides to step up to do it and reach a deal before the August 2nd deadline.

The picture was also bleak for investors in Europe. Banks bore the brunt of the sell-off. In London, shares in RBS, Barclay's and Lloyds all slumped.

In Frankfurt, Commerce Bank shares sank to an 8.6 percent loss of the day. Shares in BSkyB were also down 4.6 percent in London.

You can see the pressure filtering through the major indices.

News International has asked for information about the allegations made by Gordon Brown against two of its newspapers. It says it wants to investigate claims made by the former British prime minister, who says reporters tricked their way into his financial records. In the meantime, its parent company, News Corp, has seen further losses on the NASDAQ.

Let's bring in Louise Cooper.

She's a market strategist at BGC Partners here in London.

It's extraordinary. You have these two dual forces pulling away here. You have debt in the United States and in Europe. And then all of the surrounding hoopla about a media company which has been a dominant, dominant player.

It's extraordinary, isn't it?

LOUISE COOPER, MARKET ANALYST, BGC: I stood on the trading floor. I stood on the dealing floor surrounded by all -- all -- all the traders.

DEFTERIOS: Yes?

COOPER: And I -- I just can't believe what's happening. I watched the bond spreads in Europe just widening, just blowing out. I mean Italy and -- and Spain, the -- the 10-Year government bond spread just blew out today. I think they were -- I've got the numbers. I wrote them down for you. Italy, 5.67 percent, up 42 basis points and Spanish 10-year debt 6.01 percent, up 36 basis points, just blowing out massively. Flight...

DEFTERIOS: Well, can I ask you...

COOPER: -- flight to safety.

DEFTERIOS: Well, in fact, I was going to ask you this, because it seems now that the finance ministers and the leaders of the European Union don't really have a strategy, this containment strategy to Portugal, Ireland and Greece and this will spill over to Italy. And we've finally tuned in to the fact that the debt to GDP in Italy is high and it's just not growing fast enough to service the debt.

Why the wake up call now?

COOPER: What I find interesting is they are in, to be fair, an utterly impossible situation, because Greece needs to default. It cannot pay back the money. Giving a highly indebted nation even more debt is never a great idea. It wouldn't work for you or I, for example.

DEFTERIOS: No.

COOPER: But Greece defaulting could be really very damaging to the whole European financial system.

DEFTERIOS: So you don't buy this idea of...

COOPER: So -- so...

DEFTERIOS: -- a rollover or a buyback...

COOPER: No.

DEFTERIOS: And neither one of those options to you...

COOPER: It's kicking -- kicking the can down the road.

DEFTERIOS: Still?

You don't -- so you don't buy them as a -- a viable option?

COOPER: I don't buy them. The trouble is, unless you have the guts to really come up with a very radical solution, then I think the contagion gets worse. If you don't grab the bull by the horns and take something radical, which could be terribly painful in the short-term, then the contagion just spreads.

DEFTERIOS: I wanted to talk to you before we leave here on your views of lawsuits servicing -- class action suits, resurfacing in the United States against Rupert Murdoch. Before, institutional investors would not challenge, in a sense, if I can put it this way, the king of media. We had to live with his judgments as an investor.

Is this going to get just deeper, the challenges in courts, stronger against Rupert Murdoch?

COOPER: It's not just shareholders that were very reluctant to take on Mr. Murdoch, it was politicians here in the UK. They all toed the party line.

I think what's interesting, you know, we've seen this -- this court case in the States where you've got a bunch of investors saying that...

DEFTERIOS: That are resurfacing with the lawsuit.

COOPER: Exactly. Yes. You've got -- they've got -- saying that Rupert Murdoch treats his media empire like a family candy jar. It's inconceivable to quote -- it is inconceivable that James Murdoch n his fellow board members would not have been aware of the illicit news gathering practices.

DEFTERIOS: Hmmm.

COOPER: I mean they are very critical. And I -- I find it interesting that it's coming at this moment given that he's not in a great position, Mr. Murdoch. He is not in a strong position. And it may be that investors who are very unhappy about his performance over many years, see this as the opportunity to try to eventually do something about it.

DEFTERIOS: Yes. They've been talking about it for a while, but now they're smelling blood, I think.

COOPER: They are.

DEFTERIOS: It's nice to see you.

COOPER: It's nice to be here.

DEFTERIOS: Once again, Louise Cooper of BGC.

Just time to mention another media story today. Last week, Netflix announced they're expanding into Latin America. Their service lets you rent DVDs by mail. But a fascinating article says that Sony movies disappearing from Netflix is an ominous sign for the other streaming services. If you're near a Web browser, we've shared the article at Facebook.com/CNN/quest.